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BUYBACKS, DIVIDENDS AND UNEMPLOYMENT (PART I)

January 7, 2014

BUYBACKS, DIVIDENDS AND UNEMPLOYMENT (PART I)

There are lots of ways for corporate America to be profitable. It is increasingly difficult to be profitable by selling its goods and services here, and there is a reason for that. The reason is that aggregate demand is at a standstill, and the reason for that is that median family wages have been stagnant or declining for the past several years. ABC Corporation may know how to manufacture its widgets either here or abroad, but it has yet to figure out how to have a market for its widgets. They have seen soft markets for their widgets in both old and emerging economies as a world-wide economic slowdown is in progress, caused in considerable part by wage inequality both here and abroad, and especially here.

Corporate America has historic hordes of cash available for raising wages, construction of new plant, purchases of equipment and hiring of new employees. Consumers want to buy what America can produce, but they don’t have the money – thus less demand, less production – and more unemployment. The economic malaise for most of us is continuing with no end in sight and no policy makers with the intestinal fortitude to advance an industrial policy (such as has been done with great success in Germany and Sweden). The impact of Citizens United will not be helpful in this connection.

It’s as though corporate America is not interested in selling the goods and services for which it was organized and chartered. Corporations these days are more interested in the paper games played on Wall Street, playing the tax loophole game with their captive members of Congress, and having states and localities bid for their presence.

Those who point to the Dow and S & P as barometers of the economic health of the nation are talking about the investment and not the working class. Both such measures in a globalized economy factor in the performances (in part) of multinational interests in foreign economies and the Fed’s continuing purchase of federal paper designed to prop up the bond and equity markets, among other such plusses afforded the investment class. Neither the Dow nor the S & P measure the real economy in which the great majority of us live, which is in near recession (due largely to wage inequality).

So if corporate America refuses to expand its operations with capital spending, increased wages and hiring new employees, what IS it doing with such a huge trove? Among other things, corporations in America are involved in buybacks of their own stock, and there is little need to even use their own money for such buybacks. Why? It may be cheaper to borrow the money to buy their own stock back since the interest rates on such borrowings are currently next to nothing (thanks to “quantitative easing” by the Fed). I think that these and other accommodations to the rich and corporate class constitute artificial props to both debt and equity markets, and that when removed or substantially decreased, we will see the Dow and S & P head south. Just when that may or may not occur is in the hands of policy makers who seem to want to keep the good times rolling even if we have to borrow money to keep the lemming express headed for the cliff. I am reminded of the huge loan (aka addition to the national debt) George Bush and his Republican Congress took out to fund a giant tax cut for the rich and corporate class in 2005. They got the cut and we got the bill while wallowing then and still in the demand-killing wage inequality of penury (aka stagnant or falling family median wages).

I will write more specifically of  the rationale for corporate buyback of their stock in Part II. Stay tuned.  GERALD  E

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